In this economic update, we discuss the technology sector within U.S. equities, including the role the leading companies have played in propelling markets higher - as well as some of the potential risks and challenges this concentration may pose to investors and the market overall.
We'd like to highlight the recent 8th Annual Ladies Play Day, organized by the Milton District Hospital Foundation and presented by Elinesky Schuett Private Wealth. Not only was this year's event an excellent day on the course, critical funds were raised to help purchase new tools that support diagnosing illnesses earlier, reducing recovery times, and helping improve the overall patient experience at the hospital.
Lastly, we are sharing the latest episode from Matters Beyond Wealth: the second part in an art and collectables series. Join Leanne Kaufman (President and CEO of RBC Royal Trust) and Corina Weigl and Demetre Vasilounis from law firm Fasken, where they discuss how we should consider passing down collectibles in our estate plans.
Economic Update
Investors have been tasked with interpreting a flurry of global economic data over the past couple of weeks. These include signals of resilient but moderating growth in North America, broadening economic weakness in Europe, and a stalled recovery in China. Meanwhile, the U.S. Federal Reserve raised interest rates by a quarter percent, as expected. Notably, the Fed indicated that it no longer foresees an impending recession. Additionally, some of the largest technology companies reported quarterly results that matched lofty expectations. We discuss the “tech” sector more below, focusing on its central role in propelling markets higher and the familiar challenge it poses to investors.
Technology driving large portion of U.S. equity market
Moderating inflation, a robust economy, and enthusiasm for artificial intelligence have helped technology stocks regain their footing this year after a dismal 2022. The biggest gains have come from a select group of “mega cap” stocks. In fact, the seven largest stocks in the U.S. equity market can be categorized as “tech” companies, and their average value has nearly doubled this year. As a result, they have driven a good amount of the U.S. equity market, which is up nearly 18% year-to-date. When these stocks are excluded, the U.S. equity market has still posted gains, but at less than half that amount, which is more in-line with other regions.
Higher levels of sector concentration
The U.S. market’s reliance on a handful of the biggest companies is apparent. However, history suggests that this is not uncommon. Over the past century, there have been extended periods where the largest 5-10 stocks accounted for even greater proportions of the U.S. stock market. There have also been eras of sector concentration. The financial and transportation sectors dominated in the first half of the 19th century as the country was industrializing. In 1980, the energy sector comprised nearly 30% of the S&P 500 index at the peak of the energy crisis, a threshold that technology briefly surpassed during the dot-com bubble in 2000. The technology sector is hovering around these levels once again.
Understanding potential risks of tech-centric equity market
As risk managers, we are wary of a few challenges posed by the developments outlined above. Firstly, the U.S. market is undoubtedly more vulnerable to factors that impact the tech sector. Last year serves as a potent reminder, with the tech sector showing high sensitivity to rapidly rising inflation and interest rates, leading to broad equity market declines. Regulation, valuation, data privacy, and corporate governance are other factors impacting the sector, and consequently the wider market. Secondly, as stocks gain market weight, they correspondingly become larger weights in the portfolios that hold them. Our job is to ensure that our clients’ portfolio exposures are appropriate given their risk tolerances. As a result, we may rebalance positions that have appreciated.
Summary
Recently, there have been encouraging signs of broadening market strength. Other sectors and groups of stocks are appreciating in price, which is a healthy sign in our view. Should that trend continue, it may enhance the diversification of the market over time and help mitigate some of the risks mentioned above. In the meantime, we will be doing what we can to manage concentrations that arise and to maintain well diversified portfolios.
Over $36,000 raised by 8th Annual Ladies Play Day - Milton District Hospital Foundation
We are proud to announce that the Milton District Hospital Foundation’s 8th Annual Ladies Play Day, presented by Elinesky Schuett Private Wealth, raised more than $36,000. The funds raised will be going towards the purchase of essential medical equipment for the hospital.
Thank you to everyone involved and who helped make the day such a success. Your generous support and participation is helping the Milton District Hospital deliver better care for the community.
Art: Unique assets in estate planning—Part Two
When you think of collectibles that carry value, you may think of the traditional items like coins and stamps. More recently, pop culture items like Pokémon cards, sneakers, Beanie Babies, and even vinyl records may carry significant value.
Collectibles have many nuances when viewed as an asset, and similar to a previous episode of Matters Beyond Wealth dealing with art, they can be even more nuanced from an estate planning context.
Check out the latest episode to learn more about art and collectables as part of your estate planning.
Listen to part two of this series by clicking here.
You can also list to part one of this series by clicking here.
Reminder - Summer Hours
A friendly reminder that Elinesky Schuett Private Wealth is recognizing summer work hours through to September 1st, 2023. Please note that during this time, our offices will be closing at 4pm on Fridays. Thank you for your understanding.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
